Does DURECT (NASDAQ:DRRX) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, DURECT Corporation (NASDAQ:DRRX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DURECT

What Is DURECT's Net Debt?

The chart below, which you can click on for greater detail, shows that DURECT had US$20.5m in debt in September 2021; about the same as the year before. But it also has US$80.8m in cash to offset that, meaning it has US$60.3m net cash.

How Healthy Is DURECT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DURECT had liabilities of US$9.57m due within 12 months and liabilities of US$24.4m due beyond that. On the other hand, it had cash of US$80.8m and US$946.0k worth of receivables due within a year. So it actually has US$47.8m more liquid assets than total liabilities.

It's good to see that DURECT has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that DURECT has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DURECT's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year DURECT had a loss before interest and tax, and actually shrunk its revenue by 74%, to US$8.9m. To be frank that doesn't bode well.

So How Risky Is DURECT?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months DURECT lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$35m and booked a US$38m accounting loss. Given it only has net cash of US$60.3m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that DURECT is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.